Dollar edges down before midterm elections

LONDON (Reuters) – The dollar dipped on Tuesday as investors took a cautious approach to the U.S. midterm elections and any fallout from the vote for the world’s largest economy.

The dollar has reigned supreme this year, benefiting from the robust U.S. economy and rising interest rates.

Investors on Tuesday were focused on whether the congressional elections, the results of which are expected from 2300 GMT, could disrupt the stellar performance of the world’s most liquid currency.

The elections are expected to help the Democratic Party win control of the U.S. House of Representatives, with Republicans likely to retain their majority in the Senate.

Most analysts believe that scenario will see the dollar dip on the view that chances for any further U.S. fiscal stimulus are curtailed.

That in turn would be a boon for emerging market currencies stung this year by higher U.S. rates, in particular those currencies running big external imbalances such as Turkey, Argentina and South Africa.

But market analysts warned that an unexpected outcome could trigger an unwinding of long positions on the dollar which has rallied more than 7 percent from April lows against its rivals.

The uncertainty kept investors from making big moves on Tuesday.

“Polls have been wrong before… should the Republicans surprisingly hold Congress, the dollar, equities and Treasury yields would get a lift on the promise of Trump 2.0,” said ING FX strategist, Petr Krpata.

“Clearly there is everything to play for here.”

The dollar index <.DXY>, a gauge of its value versus six major peers traded down 0.1 percent at 96.246. It had hit a 16-month high of 97.20 last week.

The euro <EUR=EBS> was slightly higher at $1.1417, about one percent above this year’s trough of $1.1301 touched on Aug. 15.

Euro zone finance ministers called on Italy overnight to change its 2019 budget to conform with European Union rules before a deadline set for next week, but Rome dug in its heels saying its disputed deficit plan would not change.

Against the yen <JPY=D3>, the dollar changed hands 0.1 percent higher at 113.35 yen, close to a four-week high of 113.385 yen reached last week.

There was muted reaction in the Australian dollar <AUD=D3> to the Reserve Bank of Australia’s widely anticipated decision to keep interest rates steady on Tuesday.

The Aussie was flat at $0.7206, but was around 2.7 percent above a more than 2-1/2-year low of $0.7018 touched on Oct. 26.

The pound <GBP=D3> rose 0.3 percent to $1.3085, a two-week high, following media reports suggesting the EU and Britain may be inching closer to an orderly Brexit.

With talks at an impasse five months before Britain exits the European Union, investors are growing anxious and sterling is moving sharply on any news of a possible breakthrough.

The British government and EU officials have this week played down hopes for an imminent Brexit deal, emphasising that while an agreement is close, the two sides still have work to do.